The Inquisitive VC: Stephen McKeon — Collaborative Fund
Stephen McKeon is an Associate Professor of finance at the University of Oregon and a Partner at Collaborative Fund. In both those roles, Stephen’s focus is on crypto assets. Prior to these roles, he was involved with a couple of venture-backed software start-ups and spent six years as the CFO of a Napa Valley winery.
We talk about his journey to crypto and VC, Collab+Currency’s thesis, tokenised securities, stablecoins, KEEP Protocol, and more!
NA: To start with can you talk about your background and journey from working in startups to crypto, VC, and the University of Oregon.
SM: Sure, so I started my career in tech, lived in Palo Alto, worked for a startup. This was in 2000, so the height of the dot com boom. Of course that all melted down shortly after I arrived there and so found my way up to a winery in Napa and later went to get my PhD at Purdue.
When I came back to Oregon, which was 2011, I co-founded a software startup with some MBA students around commercial drone software and that’s where I bumped into blockchains, primarily Bitcoin which was the only game in town back then.
I found it really interesting, I bought a little bit just out of curiosity but we were so busy with the drone company I didn’t really have time to dive in. That company, we raised a couple of rounds of venture capital, we eventually sold the company to Verizon.
Then when I had more time, this was 2015, I looked back at crypto. Of course, Ethereum had launched at that point and it really seemed like the use cases were expanding substantially. It just grabbed my interest and so I dove in. I just started talking to everyone I could meet, developed a relationship with Chris Burniske, who was at ARK back then, now at Placeholder and I guess sort of fell down the rabbit hole as they say.
At that point, I was doing research at the university on blockchains. Craig Shapiro, who is the founder of Collaborative, gave me a call, he said they were seeing more and more deal flow around the space, so we looked at some deals together. They did several investments out of the main fund and then I joined Collaborative more formally in 2018 to raise a separate pool of capital, which is Collab+Currency.
NA: Very interesting journey and you knew Craig previously to all of this?
SM: Yeah, so I have known Craig for about 20 years, we actually both started our careers in the Bay Area and we had a very close mutual friend, who introduced us. So, I’ve been following Craig and his progression. Back when Collaborative was started in 2009, the thesis focused around the sharing economy, so Collaborative has had decentralization in its DNA forever — even before the blockchain investment thesis manifested. Which I think is why they were seeing a bunch of inbound deal flow, because people from their portfolio companies and co-investors were saying, hey you guys are definitely going to get this with the sharing economy roots and kind of understanding the collaborative economy.
NA: Got it, it makes sense why they would have seen that deal flow. When you eventually joined and started Collab Currency, how did you go about that? Could you talk about the process, what the thesis of Collab+Currency is and did you happen to derive inspiration from any other funds when forming that thesis?
SM: Yeah, so my background is in finance. I have been a finance professor for many years, so we always knew the thesis was going to revolve around financial infrastructure to some degree. So, that’s the core portion of the thesis.
We knew that Collaborative, having a decade in early-stage investing just had a lot of institutional knowledge around that piece as well. So we invest both in equity and in tokens. I wouldn’t say we modelled ourselves after any specific other fund but certainly, somewhat close to Placeholder, in terms of both funds being on the VC model.
One thing that is important to understand, is that a lot of the funds in this space are structured like hedge funds and that makes sense if you are going to focus primarily on liquid assets because then you can move in and out and so on and so forth. With Collaborative, we are structured as a VC fund and there’s a few of those in crypto, but I would say that the mentality is a little different because whether we are buying a liquid asset or whether we are investing in an equity round, we maintain that long term focus, as opposed to more of a trader focus.
NA: Got it, that distinction is quite important. You mention you raised an additional pool of capital for Collab+Currency, how did that process go? When you were talking to LPs how was it in terms of differentiating yourself from all the other crypto VCs and fund managers who have popped up? Did you find that the LPs already had a lot of education on this space or you had to introduce the concept to them a bit more?
SM: Some of both definitely. Some of our LPs were very enamoured with the crypto space, some already had positions in things like Bitcoin and were looking for some additional exposure both with liquid assets and to some of the early-stage deals.
In other cases, especially with more of the traditional investors, things like pensions and endowments, this is their first investment in the space. So there was definitely some education around why this space is exciting, why we think it’s an amazing opportunity, what the asset class looks like today, and where we see it going in the future. So yeah, definitely some of both.
NA: Good to know that some were already exposed to Bitcoin. How have you positioned Collab+Currency in terms of providing value to startups you are investing in compared to the other VCs?
SM: There are a few different things. I think one is, we can draw on the brand Collaborative has built over the last decade. Reputation alone has been really important just in terms of being a value add investor. Having expertise around consumer, having expertise around sharing economy and collaborative economy, and just having really deep networks.
What you find with a lot of crypto funds is that they’re first-time funds, which makes sense because it’s a very new asset class. There’s only a handful of established entities that have a dedicated pool of capital directed to the space, and that was one of the points of differentiation.
The other piece is just my background as a finance professor, and being able to think about how to model markets in a rigorous way was something that has been a differentiator.
NA: Fair point, there definitely aren’t many established VCs with dedicated crypto funds. A quick question on the thesis, do you have a global mandate or you’re just focused on the States?
SM: It is a global thesis, and again that is another thing that is really different from traditional VC right because there is a strong local bias in traditional VC, where generally speaking a vast majority of investments are going to be near one of the offices of the fund. In crypto that just doesn’t work because the teams are distributed, the projects are distributed all over the world.
We have positions in the portfolio like Spacemesh and Starkware both of them are in Israel, we have Zebedee which has a presence in both London and the US, we have got groups with teams in Asia and South America, so you really have to have a global focus as a crypto investor.
NA: For sure, you mentioned when talking about the thesis, there is a lot of focus on financial infrastructure, apart from that where do you see the most opportunity with blockchain technology from here onwards?
SM: I think the key is really around trust, because that’s the core thesis of the whole space. These systems make the most sense when there’s some sort of trust issue in the market. Anytime you have value moving around, very frequently there is some sort of trust issue.
I think the other piece is around automation. I’ll give you an example of a non-core investment: we recently invested in a project called Zebedee and they are working at the intersection of crypto and gaming. We always felt that those two verticals were a match made in heaven.
If you look at many of the people that were early entrants into the space, they came out of gaming, because the idea of a digital asset is something that predates crypto by quite a while, in terms of gaming environments. So, we have long felt that crypto was going to make its way into gaming.
Although gaming is not a core part of our thesis, the idea that you can bring bitcoin, primarily through the lightning network, into the gaming environment was very exciting and in essence, it is still sort of financial infrastructure.
I guess that’s one of the things that’s interesting about the space, is that to some extent you are building rails to move value, even if you are in an environment like gaming, so that still represents a piece of the financial infrastructure.
Even though we describe the thesis around financial infrastructure, that thesis is quite broad, because most of the projects in this space, even if they are an application to a different industry, still have some relation to financial infrastructure.
NA: We talked a little bit about token funding, do you think we will see a resurgence in some sort of token-based funding mechanism open to retail investors?
SM: The regulators aren’t making it easy, you’ve seen the recent decision against Telegram, which was unfavourable, and incidentally to my knowledge Telegram never sold to retail investors. It was just the prospect that they might sell to retail investors or issue tokens that find their way into the hands of retail.
I think that we are probably not going to see anything like the ICO boom again, just because those were executed completely outside the regulatory lines in many cases. However, as you know security tokens have been a fascination of mine for many years, and we are seeing more and more development along those lines, but I think that it’s going to require KYC and AML if they have plans to launch inside the US.
NA: Fair point. In regards to tokenised securities, I think that they will create a lot of value and will help democratise investing. In reference to that, what do you think is the future of tokenised securities? I’ve been hearing about it for over 2–3 years and its seems like it’s taking its time to come to maturity, how far along do you think we are?
SM: Still a long way to go, especially if you think about it on the scale of requiring the whole infrastructure. The thing is that it just doesn’t happen overnight. These are very old systems and institutions that are at play here. Whereas the ICOs were something completely new.
These were new entities, new investors in many cases, new payment methods, you’re just not going to see that in more traditional markets, like tokenised securities. Securities have been around for a very long time. So the idea of creating pointer assets that reference those securities and getting that all wired up, and getting mainstream investors onboarded on to these systems, it is happening, but it’s a process.
If you look at the amount of security issuance in tokenised form, I don’t have the numbers right in front of me, but it went from maybe $20M to several hundred million to a couple of billion last year and it will be billions in 2020. We still have to wait and see how COVID affects everything but it was certainly tracking to be potentially tens of billions. So, the growth rate is substantial, it’s just that we are still really early and ultimately you’ve got trillions of dollars of assets out there.
Even if we are $10 billion, it’s hardly a dent in the total market size. I expect that market to continue growing at a really high rate for many years to come because it’s going to take a long time to get everybody onboarded.
NA: Sure, there have been increasingly large issuances over the past year. An argument that I have heard when talking about tokenised securities in real estate, is that a major benefit security tokens offer is fractionalisation of property, but people compare it to REITs. How do you think they actually compare and why are security tokens a better option?
SM: Yeah, so the thing with REITs is that they may make sense for very large pools of assets, but there are lots of individual buildings, and smaller funds, where going through the entire REIT process is not going to make sense from a cost standpoint. Whereas tokenising a single building is going to be substantially more cost-effective.
I think as you see more ATSs come online, these are companies like Archax out of the UK, as well as Texture Capital and tZERO here in the US, then you’ll have more trading venue for these assets and you will start to see custody get sorted out. Custody has been a real nightmare for security tokens because generally speaking the average investor just isn’t comfortable with Metamask.
They don’t want to hold their assets on Metamask, they want it to look and feel like Fidelity or some sort of traditional investment portal that they would be accustomed to. So the custody issue is now being sorted out by a lot of the firms I just mentioned earlier as well as firms like Vertalo and Tokensoft and others. Custody is one of the big pieces of unlocking the mass market appeal of tokenised securities.
NA: Completely agree. I read in a blog post you wrote announcing Collab+Currency, you talk about the interest in tokenised securities. Has the fund made any investments related to tokenised securities yet?
SM: We have not made any direct investments, although I think we’ve made investments in projects that we think are going to be adjacent to tokenised securities down the road. For example, Arwen, which is focused on cybersecurity, could be related to tokenised securities. TaxBit, we think could be related to tokenised securities. Even KEEP, right? The use case they’re going to market with initially is Bitcoin on Ethereum, so basically allowing Bitcoin to interact with DeFi.
If you think about KEEP it’s really just a container that allows you to move assets between ecosystems, so we think that could be related to tokenised securities down the road as well. We often have tokenised securities in mind when we are making investments, and I suspect we will take a more direct position in something within the tokenised securities space at some point.
NA: As an economist, could you talk about what are your thoughts are on stable coins?
SM: I have been interested in stablecoins as long as I have been interested in tokenised securities, I do think they work hand-in-hand. The idea is that for mainstream investors the way you get them into crypto is that you first give them something that looks and feels like their native currency. So, the idea is to unlock some of the features of smart contracts and automation and interacting with DeFi protocols, without having to expose them to currency risk, such as holding their assets in bitcoin, or ethereum or some of the other more volatile assets.
Then it really comes down to model. You’ve got the model of fiat reserves or an asset-backed stablecoin, and of course, Tether was the first one there but now you’ve got TrustToken and USDC and Gemini Dollar and a bunch of others. You’ve got the algorithmic version, models like Basis, which of course didn’t work.
Then you have the decentralised versions like Maker and Dai, and I personally think those are the most interesting. We do have a position in Maker, and Dai is integrated throughout the DeFi ecosystem. It will be interesting to see as Libra comes to market what impact that has in terms of bringing consumers and the general public to the crypto ecosystems.
NA: For sure, Libra is definitely very interesting in terms of how it will impact the general population. What is the latest publicly announced investment you have made and why?
SM: Sure, the most recent investment that closed was KEEP. We closed that just before the crisis hit. The reason we made it, well it was a variety of reasons. The idea that Bitcoin, which is by far the largest asset in the space, isn’t really integrated into DeFi has always seemed crazy to us and that’s the obvious first use case.
It’s interesting because Matt Levine wrote a blog post in which he mentioned KEEP and he described it as similar to an ADR (American depositary receipt) for crypto. If you think about what an ADR is, you’ve got a foreign issuer and they want to trade in the US. So instead of direct listing their shares, which is one option, more frequently an intermediary will take the foreign shares put them in a container which they call an ADR an American depositary receipt and then list that ADR on the US exchanges.
You can kind of think of KEEP doing the same thing for the crypto ecosystem. So, if you want bitcoin on ethereum so that you can interact with all of the ethereum DeFi applications, then you take the bitcoin you put it in a container to convert it to tBTC, which then trades on Ethereum. That is one use case but that is not the only use case.
You can imagine this working, as I mentioned earlier, working with tokenised securities, and as we see more and more layer ones grow up, between Tezos and Algorand and Polkadot and others it’s going to become more and more important to port assets across chains. I’d say that as well as being really impressed with the team, were the reasons we made that investment.
NA: That’s great to hear. tBTC is definitely a very interesting project. Thank you so much for taking out some time to talk to me Stephen it was an amazing chat.
SM: Not a problem!
